nificant ‘‘crash’’ of the stock market where trillions of dollars of wealth disappeared over
night. While the dot com and housing sectors were affected the most, virtually every
sector of the economy was impacted negatively to the point that both crashes were
followed by economic recessions.
The interesting aspect of ‘‘bubbles’’ and ‘‘crashes’’ news reporting is that investors’
perceptions have been that one must follow the other. Therefore, if there is a bubble the
news reports will start asking the question ‘‘when will the bubble burst?’’ and if there is a
‘‘crash’’ the news reports will start asking questions like ‘‘have we hit the bottom yet?’’
Day-to-day tracking of moves in the three stock market indexes is communicated to
the investing public by virtually every news outlet possible, in every possible form of
media, from print, radio, and TV broadcasters to the internet and mobile devices.
4.4 News moves stock prices
The value of the stock price of any business is influenced by the investors’ expectations
of the future earnings of that particular business. If the business has great prospects
there may be a potential to place a high multiplier on the current earnings per share
value in order to estimate the future earnings value of the business.
A strong effort to communicate that potential could realize a high multiplier on the
current earnings per share value by introducing more buyers to the stock. As more
buyers come in, the existing investors may postpone selling to realize the full stock
appreciation potential.
Investors’ expectations regarding the future earnings of the business are measured
through the value of the multiple placed on future earnings. Future earnings depend on
a multitude of factors and the reality very rarely matches the forecasts.
News about a company’s business has the potential to change the demand–supply
balance and affect any stock price. Often times, the lack of news may be perceived as
‘‘negative’’ news. On the other hand, widely distributed positive news regarding future
earnings may attract new buyers to the stock. The stronger the demand for the stock, the
higher the multiple may become.
4.5 News vs. noise
The growth of the highly influential blogs and large social networks online has blurred
the line between news and noise regarding companies’ business prospects. As stock
price earnings multiples are based mostly on the sentiment of the investors regarding
future earnings, even rumors spread throughout these new channels can move prices
significantly.
Once a stock moves 5% or more in one direction or another, the move itself becomes
news that is distributed throughout the traditional financial news outlets.
Financial websites, newsletters, and radio and TV broadcasters have all created a
significant audience and are in a position to create news by providing opinions and
analysis as a result of simply repeating or interpreting reporting from the traditional
financial news media.
An indicator that news is very difficult to differentiate from noise comes from the fact
that venture capital firms have invested a significant amount of money into new startup
Measuring the value of media sentiment: A pragmatic view 111